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April 17, 2013

Ah, Spring! When HNW Clients Renovate Their Homes, With 6 Big Risks

Beyond the traditional spring cleaning, the new season often inspires more ambitious plans for elaborate home renovations—a new pool, an additional room over the garage or a fully finished basement. Many financial planners may be asked by their clients about the affordability and wisdom of undertaking such improvements, particularly if funding the effort requires the liquidation of financial investments. As part of their answer, wealth advisors could provide an added service by encouraging clients to consult with their insurance agent.

Too few homeowners remember to take such a step. As a result, they leave themselves exposed to a wide variety of dangers. The fact is, homes under construction represent one the most dangerous situations for a family and home, and homeowners should take a variety of steps to protect their home before, during and after a home renovation project.

Here are six risks that need to be addressed:

Poor safety procedures endangering life and limb

Flammable rags and paint, exposed electrical wiring, open walls and roofs covered by tarps, dumpsters full of wood scrap, temporary stairs and blocked entryways: all these joys of a home under construction heighten the risk of fire, water damage and injury to family members. The insurance agent and company can help ensure that the contractor follows proper safety procedures to minimize these risks.

Homeowners should also take an inventory of their possessions before construction starts. They may have to move items from one room to another or to a temporary home during construction. The risk of damage, theft or misplacement increases greatly, and having an up-to-date inventory makes the claims process much easier if a loss occurs.

Untrustworthy workers with malicious intentWhen a client invites a construction crew into the family home, sometimes for months, the crew can become familiar with family routines, valuable articles and even safety codes to alarm systems. They are in a unique position to do harm, and HNW clients represent a tempting target. While the vast majority will resist temptation, some will not. To minimize the risk, the insurance agent may recommend professional background screens of the workers. Better yet, insurance companies that cater to HNW clients, as ACE does, usually offer access to such services on a complimentary or reduced fee basis.

Inadequate liability coverage for worker injuries

Construction work is dangerous work. A serious head, neck or back injury after falling off a ladder or tripping over an ill-placed piece of equipment can result in decades of worker’s compensation medical bills. The general contractor or subcontractor may not have enough insurance to cover the cost. In such cases, the injured worker may sue the homeowner, too, especially if he knows the client to be wealthy. The insurance agent can review the contractor’s policies and advise if the client should ask the contractor to secure additional coverage or purchase worker’s compensation coverage himself. Homeowners and umbrella liability policies typically exclude liability for construction-worker injuries.

Restricted property coverage during construction

Failing to notify the insurance agent and company about major renovations within a certain period of time can trigger restrictions in homeowners coverage. If the client has a policy that does not cap the amount it will pay to rebuild the home after a total covered loss, the carrier might restrict coverage by capping the amount at the home value listed in the policy. Furthermore, if the client has a policy that provides replacement cost for the contents of the home, coverage could be restricted to actual cash value. Actual cash value takes depreciation into account when valuing items, while replacement cost coverage does not. Finally, the policy language may also impose a higher deductible, such as 5% of the home’s value. On a $2 million home, that’s a $100,000 deductible.

Missed opportunity to upgrade safety systems and earn insurance premium creditThe cost of upgrading safety systems in the home could be much lower during home remodeling because the necessary workers are already there and the interior workings of the home are already exposed. The insurance agent and carrier could offer advice about the latest water-leak detection and shut-off devices, automatic standby generators and alarms linked to central monitoring stations. Since these systems make the home safer, insurance companies often offer credits that in combination can reduce premium by 30% or more. Credits may also be available for upgrading electrical, plumbing and temperature control systems.

Inadequate coverage for the larger, more luxurious home and additional contents and furnishings after completion

If a home was insured for $1 million and the client added a room, expanded the kitchen, and finished the basement, it may now take $1.5 million to rebuild after a disaster. If the client didn’t inform the agent and have the coverage limit for the home raised appropriately, the home could be underinsured.

Furthermore, the contents of the home could be underinsured. The amount of personal property coverage is typically set as a percentage of the home structure value listed on the policy. If the client purchased additional or upgraded furnishings as part of the remodeling but didn’t adjust the home value, he or she may not have enough personal property coverage.

The decision to expand or remodel a home represents a major financial and lifestyle decision for HNW families. Financial planners whose clients trust their advice to consult on these matters can deepen their relationship by remembering the property and casualty risks associated with the decision. By encouraging the client to consult with a qualified independent agent or broker with access to carriers that specialize in serving HNW clients, they can go above and beyond fulfilling their fiduciary duty.

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